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Fixed Wireless Business

Leasing Wireless CPE

Many ISPs either take out a loan to buy customer equipment or lease the equipment, and proponents of each method are carrying on a debate that's as old as the WISP industry.

[February 14, 2006]

In an unrelated thread on the ISP-Wireless list in August, TJ was asked how he worked the finances of leasing. TJ replied:

"That wasn't really the point of this thread. The idea is I can either make $25 per customer by leasing the equipment, or have 80 percent of my potential customers go to cable/DSL/licensed competitors because they do $99 installs. Whether or not you can make money on a $25 per month customer is up to you and how you run your business. I'm making a profit. Every month. :)"

[BG, ever precise, objected] "If you are charging the customers $40 per month and paying $15 a month for their radios (though I don't see how that is possible with $475 Trango radios; the payback period would be nearly 3 years if the leasing company made no profit) you are not making $25 per customer.

RA had another objection:

"The issue is that the Trango radios cost not $475 but more like $100. So Trango does well, the leasing company does very well, and [the ISP] does okay. . . My issue with it is that in 3 years, I don't know if the radio is worth even $1 and at $15 per month, [the ISP]is actually paying more than list price but without incurring the capital expense. If the radios don't make it to 3 years, then [the ISP] is in trouble. We think 3 years is stretching it with [wireless] CPE."

[TJ responded] "Although it would be nice if the radios make it past 3 years, I'm not counting on it. Even if 50 percent do, then that's great, but if they don't, I'll just continue leasing new radios. You can make money on $25 per month customers at 512 Kbps so any radios that are left after 3 years would just be additional revenue. BTW, I still have old Orinoco RG units with Karlnet Turbocell running, going on 4 years! ;)"

PD had additional objections:

The only problem that I see with leasing equipment is the problem with leasing (almost) anything. The depreciation, the principal, the interest, and the profits (for the leasing company) are all rolled into those lease payments. Even with a $1 buyout at the end, its generally not the best way to buy stuff.

If you borrow the money and buy the equipment, it sometimes takes a little longer to write it off on the taxes, but it puts you in a lot more control. Paying cash puts you in even more control, but we all don't have the ability to make that happen. If the equipment cannot justify/pay for itself in a timely manner its usually not the best equipment to buy anyway. Leasing locks you into payments to some bank for some piece of equipment for some period of time, that you may or may not be currently using, that you may or may not like anymore, and you may or may not be making money with anymore. If a CPE costs $300, and pays for itself in 8 months, and lasts an average of 36 months, why would you finance it for 60 months? Besides that, by the time you pay all of the lease fees, balloon payments etc, some leases are around 15 percent APR or more. I am in this business to make money for me and my partners. The bank can make its money somewhere else when I finish getting them paid off.

We buy our CPE. They pay for themselves in 5 months, and we depreciate them out over 24 months. Each month, our subscriber base pays us enough to pay our fixed costs, pay the employees, buy a few more CPE, and pay off a little of the principal (and interest) on the capital that we borrowed to get into this business. For us, leasing doesn't make much sense. I am not sure why anyone would lease the CPE. As a business person, you have to make sure that every dollar is working as hard for you as possible. Paying $600 (over 48 months) for a $300 piece of equipment isn't usually the best way to make that money work for you. It just hides your debt/cashflow position in artificial numbers."

[TJ replied] "While I agree that interest is the single biggest thing to avoid as a small business owner, sometimes there is no other choice. About 5 years ago, we were buying the CPE and then getting as much for the install / setup as possible and trying to roll things the best we could. However, DSL and Cable showed up about that time with a $99 install (including all hardware, setup, etc.). I decided then that we either needed to get in the game, or get out. The only way to get in the game was to finance the CPE. Well, no bank is going to finance CPE that they can't go pick up if you don't make the payment. So, we turned to leasing. Granted, the rate changes from month to month and leasing company to leasing company, but I am able to factor that into each deal.

We currently pay about $12 per month per CPE (on average, using 900 MHz, 2.4 GHz, 5.3 GHz and 5.8 GHz CPE). This also includes some tower build-out because I usually bundle 4 to 10 APs in each lease deal. I am able to use the $99 install we charge to pay for the truck roll, and from day one I am making profit on each customer.

I would love to be able to self-finance all of our CPE, but we are currently doing 80 to 100 installs per month. There is no WISP that can do that many installs per month and self fund all the CPE, and I would rather have leasing companies only tied to the equipment than having 'money partners' or VCs tied to my whole business. ;)"

[PN agreed] "When we roll out a new cell install for a new community, we have to be ready with 50 to 100 CPEs off the bat. We are targeting small communities that do not offer any other type of broadband service and they are anxious to get service. If we put them off until we could afford to buy individually each CPE we would have nothing but frustrated and mad potential customers."

[TJ added, responding to PD] "The problem is you can't scale and grow with the model you have. You are slowing your growth on purpose, which I understand. However, to compare models, I will have 4x as many customers installed in the same period of time by leasing:

• 1,000 customers x $40 per month gross ($28 per month net after CPE) = $28,000 per month income
  
  
• 250 customers x $40 per month gross = $10,000 per month income"

[PD replied] "Actually, I can grow and scale as fast as I want. My bank will loan me the money. I just don't have the manpower to grow any faster than I can buy equipment with cash right now anyway, and we are trying to keep from digging a deeper hole into debt. Part of my apprehension against leases is the horror stories I have heard (like earlier in this thread) where because you didn't notify the leasing company in writing 60 days ahead of time, that you were stuck with $3,000 more in payments. Traditional bank loans simply don't work that way."

[TJ empathized] "I completely understand your position. For us, the problem was banks would not touch us. We have been a profitable WISP since 1998, but we don't have a ton of cash because we put it all back into building new tower locations, etc. I agree bank loans would be better.... but at some point your bank will stop loaning money (due to the amount currently out vs. debt ratios, etc.) and then you will have a problem. I wish there were another solution. Paying 10 to 15 percent interest on some leases seems outrageous. But we have never been turned down, and I'm not locked into a single source for capital."

[FM warned] "Take care! Leasing with a one-dollar option at the end of the lease is not a true lease, but a simple conditional sale contract, in the eyes of the IRS and cannot legally be written off as a direct monthly expense (ask your CPA). In a true lease, the end-of-lease purchase price must approximate the real value of the product. The IRS can make you go back and capitalize the purchase if they audit."

[Ed. note: yikes. Do ask your CPA.]

SW even recommended using credit cards (as many other WISPs do).

"One would think that some can get a very good rate on a credit card and do just as well. We have one card we use just for our wireless purchases and it's paid off by the time we need our next batch of radios. We never max it out. . . . Every install we do, that first payment just goes to the card, and we just keep going."

—End